Franklin Income: Stocks' Payouts Beat Bonds'

AS INVESTORS DEBATE whether the economy will ultimately reward them more for collecting bonds' tiny coupon payments or accumulating equities' more robust dividends, we thought it was a good time to check in with a portfolio manager who makes such decisions for a living.

Edward Perks is co-manager of the
Franklin Income Fund
(ticker: FKINX), a 62-year old investment vehicle that now oversees more than $52 billion in assets, making it one of the country's 25 largest as tracked by Lipper, the Thomson Reuters unit. Perks shares the reins with Charlie Johnson, who's also the chairman of Franklin.

Franklin Income seeks to generate high income for its shareholders, going almost anywhere to get it. As Perks explains, Franklin's huge size "lets us really look at the entire capital structure of a company: bank debt, corporate bonds, preferred stock, common. We really look at our purchases as investments in a capital structure." The fund is known to hold very large-cap dividend payers as well as a lot of utilities, but also to venture into high-yield bonds.

Perks, who joined the fund in 2002, says that comparative valuation points to stocks, not debt, as the best place to wait for the economic recovery to unfold. "It's an interesting time when strongly positioned corporate dividends outstrip the yields offered on those companies' own long-term debt. Companies seem to be strengthening, but there's still uncertainty over how demand will look."

The fund has shifted from 70% debt and 30% equities in 2009 to about 60% debt and 40% equities as it continuously hunts for the best values. Although fund flows continue to favor bonds, Perks says that "We're hearing from our investors that our gradual increase in equity exposure is merited." The firm lightened up on some bond holdings earlier this year after they'd run up sharply as the financial crisis eased.

These days Franklin favors those unloved large-cap conglomerates like
Johnson & Johnson
(JNJ),
PepsiCo
(PEP) and
Southern Company
(SO). Another example of how Franklin works is the recent stake it took in
Chesapeake Energy
(CHK) 5.75% convertible preferred stock, in addition to the corporate debt it holds. The firm was pleased with the improving growth prospects and chose to increase exposure with this equity-linked investment.

"We need to stay focused on the long term in this challenging period, and we believe large-cap global companies are the best place to capture future growth," says Perks.

Perks' views merit attention: Despite a disastrous stretch in 2008 when it got caught in high-yield debt, Franklin has been a stellar performer over time. This year it's up 4.29%, better than the Standard & Poor's index and 95% of the funds in Lipper's mixed asset category, and it's provided a one-year return of 16.55%,better than 99% of peers. Over five years, Franklin's return averages 3.88% per annum, topping 91% of peer funds, and over 10 years its average gain of 6.86% is better than 97% of its rivals. Sustaining that impressive run will depend on whether Perks' tilt toward dividend-paying equities is on the mark.

SO FAR IN 2010 THE PUBLIC HAS POURED $31 billion into international- and global-debt funds. That tops the $29 billion it invested in foreign funds during all of 2009, according to Lipper FMI. Meanwhile, non-domestic equities have attracted only $20 billion, compared with $47 billion in 2009. "Clearly there's a preference for debt," says Robert Adler, an independent fund-data consultant.

But investors need to think again if they believe international fixed-income funds bring safety, says Henry Schlegel, president of Vontobel Asset Management, a long-time investor in emerging-market and other foreign securities.

"Domestic fixed income is designed to deliver stable and predictable income and preserve capital acting as the portfolio's anchor to windward," adds Peter Newell, a senior advisor with Vontobel. "Foreign-fixed income introduces a component of currency risk that upsets the balance."

High-quality, high-yield foreign stocks present a better opportunity, they say. Shares of
Unilever,
for instance, have a dividend yield of 4.2%,
Novartis
3.9%, and
CPFL Energia
7.6%. Foreign stocks also introduce currency risk, but they have much more upside potential than bonds.

HEDGE-FUND VIRTUOSO Stanley Druckenmiller, whose Pittsburgh-based firm Duquesne Capital Management has had one of the business' best long-term investment performances, is leaving the stage. In 20ll, he's closing Duquesne, which handled $12 billion. In an interview with Bloomberg News, the 57-year-old Druckenmiller, a one-time investment strategist for George Soros, admitted having difficulty reaching the high performance notes he was famous for in earlier years. The market's just too tough. Duquesne reportedly is off about 5% this year, raising the possibility of its first down year, and potentially, poor client reviews. In retirement Druckenmiller plans to run a family office overseeing his own fortune, estimated by Forbes at $2.8 billion, play golf and support his charities.

Slipping Away

Stock funds had weekly net cash outflows averaging $956 million in the four weeks through Wednesday, according to Lipper FMI. But money, taxable-bond and muni funds had inflows, averaging $7.9 billion, $6.2 billion and $1.1 billion, respectively.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.